Last week, I published an article challenging assertions that the proposed Comcast-TWC merger is anti-competitive, and would give Comcast too much leverage in carriage negotiations with cable networks.
It has also proven popular to posit that the proposed merger is actually motivated by the broadband business, and that net-neutrality-related issues of leverage with respect to internet-based content providers, such as Netflix, are the real point of concern.
I don’t think either proposition is correct, and I thought it worthwhile to again take some time to explain why.
Between television service and broadband, broadband is certainly the more attractive business. But Comcast management is disciplined, and clearly driven by a vision. They are paying top dollar for TWC. It doesn’t make sense to spend so much, if what they really want is just to buy a lucrative broadband business. And it definitely doesn’t make sense to focus on buying major market systems, such as New York and Los Angeles, which have much more robust broadband competition (think Verizon FiOS, and to a lesser degree, AT&T’s systems upgraded to high-speed DSL for U-verse) than smaller markets. But of course, that’s just what Comcast is proposing to do here: they’re going to retain the larger market systems, and sell off (to Charter) 3 million subscribers in smaller markets.
Furthermore, there really aren’t significant scale advantages to be gained for Comcast on the broadband side. It’s questionable whether going from 22 million to 30 million subscribers will actually give Comcast significant additional leverage in carriage negotiations on the television side of the business, but that’s an area where scale clearly does matter. On the broadband side, it’s much less clear that Comcast has a significant scale advantage over even much smaller operators, so it’s really hard to see how going from huge to even bigger makes any difference in terms of scale advantages, when it comes to broadband.
So what is Comcast’s motivation likely to actually be?
Well, television service is the lousy end of the cable business, without a doubt. It is highly competitive on the consumer side (frequent assertions to the contrary, notwithstanding) with at least three, and often four, providers in each market—not to mention emerging “over-the-top” internet-based competition. And on the content side, the programmers and broadcasters have all the leverage. So the economics of television service are really challenging.
But television also pays the bills. That is, television typically still represents half or more of cable revenues. Even though not terribly profitable, it pays for a lot of the cable system overhead: the cost to maintain and improve the plant, to provide customer service (let’s not get sidetracked by a debate over the quality of such), to handle all administrative operations, etc. And what’s more, Comcast pretty clearly tipped their hand that they were serious about television service, for the long-term, when they acquired NBCU.
So to my view, this merger is about television, not broadband. It’s the only sensible reason for Comcast to consider paying top dollar. It’s the only reason for Comcast to be focused on buying major markets, in particular.
But if scale economies in negotiating carriage agreements aren’t the likely driver, at least not alone, then what is?
Perhaps scale economies in the cable television technology platform.
While the cable industry has been enormously successful in creating scale economies by standardizing the technology platform for the broadband side of the business, particularly through the DOCSIS standards, the industry has been remarkably unsuccessful in standardizing the technology platform for the television side of the business. And yet, some important initiatives demand such.
Comcast is clearly interested in interactive advertising, and interactive advertising is clearly going to require a standard platform, with a national reach, to go mainstream. All efforts to date to build such a platform by cooperative effort among the operators have failed, and not for lack of trying. (Comcast invested very significantly in the failed Canoe Ventures.)
By now you’ve probably seen the chart that shows a combined Comcast-TWC with coverage in virtually every top 50 market. That’s reach. And with that, and particularly with significant coverage in the nation’s two top markets, NY and LA, Comcast achieves national reach on its own, and quite conceivably, enough reach to attract serious interest from advertisers.
Another consideration might be standardization of the set-top box application platform. Comcast has invested significantly in creating, and standardizing, a high-end next-generation set-top box software platform, with the RDK platform and it’s X1 system. But today, everybody knows that no one company can do it all, even with “special purpose” devices. After all, would iPhones and Android phones be anywhere near as useful and popular, if not for all the third-party apps available?
Comcast presumably recognizes this. Their X2 UI demo at the National Cable Show last year included demos of non-traditional television apps, such as one to interface with the Jawbone Up fitness band.
But the set-top-box market is highly fragmented today, and when application developers have opportunities to develop for proven smartphone and tablet platforms with hundreds of millions of users, even Comcast’s 22 million subscribers could have difficulty attracting developer interest (particularly as a nascent platform).
Recent reports have indicated that Comcast is actively working with other cable operators to license the X1 platform, but TWC (the largest of the other US operators, by far) seemed unlikely to be one of them. TWC has invested significantly in its own R&D, including for set-top-boxes, and TWC has a history of developing its own (slight-variant) specifications, amid Comcast efforts to drive a new standard, as they did when they unveiled their own CESAR specification, as Comcast was finishing up its CMAP standardization effort.
Now, I certainly wouldn’t suggest that Comcast would undertake such a large acquisition just to advance a set-top box standard. But it certainly could be a nice additional benefit to a very plausible primary purpose of facilitating a viable national interactive advertising platform.
Any transaction this large surely has many different aspects that support and enable the decision to proceed. The aspects that motivate the acquirer and drive the deal to occur, however, are surely many fewer. While the broadband business opportunity presented by TWC undoubtedly supports Comcast’s decision to proceed in this case, the drivers for the deal almost certainly relate primarily to television, not broadband.
If you found this article interesting, you may also be interested by our recent articles Comcast-TWC and the Public Interest and Are ISPs Gouging US Broadband Users?